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Buying the Dow's worst-performing stock has historically generated big returns the following year, according to a study dating back 25 years

Business Insider logo Business Insider 1/2/2022 (Carla Mozée)
Mickey Mouse at Disneyland in Tokyo. Yoshikazu Tsuno/Getty Images © Yoshikazu Tsuno/Getty Images Mickey Mouse at Disneyland in Tokyo. Yoshikazu Tsuno/Getty Images
  • Bespoke Investment Group looked at 25 years of the biggest annual winners and losers on the Dow Jones Industrial Average. 
  • The result showed the Dow's worst losers have roughly doubled the performance of the top winners in the following year. 
  • That may bode well for Disney stock in 2022 after ending 2021 as the biggest decliner among blue chips. 

Walt Disney ended 2021 as the worst-performing stock on the Dow Jones Industrial Average, but if history holds sway, the index's biggest laggard has a strong shot of swinging to produce gains for investors in 2022. 

Disney stock last year dropped by 14.5%, weighed in part by weak fiscal fourth-quarter results and a slowdown in the growth of subscribers to Disney+ streaming service. On the other end, Microsoft's 51% surge leaves it as the best performer among blue chips in 2021. 

Bespoke Investment Group looked at the Dow's biggest losers and winners over the past 25 years to determine if an investor would be better off riding the momentum and buying the index's top winner each year or if the better bet was to take a contrarian approach and buy the largest decliner. 

Bespoke found the Dow's worst decliner had an average percentage gain in the next year of 12.1% and a median gain of 15.8%, with positive returns 58% of the time, according to a Tuesday note. 

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Meanwhile, the Dow's biggest winner each year averaged only a gain of 6.71% in the following year with positive returns 45.8% of the time. "On a median basis, the next-year performance for the Dow's biggest winner is actually negative at -3.96%. Not very good!" the independent investment firm said. 

While the 25-year performance shows the Dow's biggest losers roughly doubled the performance of the biggest winners in the following year, Bespoke said it was important to note that the trend has reversed more recently. 

From 1997 to 2006, the worst Dow loser posted positive returns in the following year eight out of 10 times for an average gain of 32%. However, over the last eight years, the firm found the laggard has been positive three times in the following year and the average next-year performance has been -6.2%.

Beginning in 2016, when heavy-equipment maker Caterpillar was the biggest winner, the top Dow stock has been up every time in the following year for an average gain of 42%. Before 2016, the lead stock had only logged advances in the following year six out of 19 times. 

"This brings us back to Microsoft and Disney," Bespoke said. "Based on recent history, riding the momentum with MSFT would be the way to go, but going back 25 years, it's Disney."

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